There is definitely a lot of discussion about NFTs and DeFi. Intuitively, the lack of financial primitives around NFTs leaves NFT holders very limited in what they can do with NFTs.
This is a relatively complete article on NFT financial primitives.
For example, if NFT owners want to free up working capital, they need to sell the NFT or leverage OTC liquidity (if they can).
Three key primitives need to be addressed before NFTs are truly universally applied to DeFi:
- Oracles – the ability to receive asset pricing information
- Borrowing – the ability to obtain secondary liquidity for the asset
- Exchange – a liquid market for the exchange of one asset for another
As the saying goes “the rest are secondary causes”.
There is a high degree of overlap between these solutions – for example Uniswap v2 and v3 oracles are widely used in DeFi, even though Uniswap’s primary purpose is exchange-oriented.
ERC-20 + AMM
The first and easiest way to price NFTs is a combination of ERC-20 assets plus AMM liquidity, whether it’s fragmentation via the Fractional protocol or 1:1 conversion via the NFTX protocol.
A notable example is the NFTX vault, after depositing an NFT into the NFTX vault and receiving an ERC-20 representing this NFT. They can then provide liquidity for the ETH:$NFT pair on Sushiswap.
This approach has several disadvantages.
First and foremost, this is only good for floor assets. If you have a Zombie Punk, you’re out of luck with this method unless you’re trying to do charity.
Second, a lack of liquidity can mean that these pools are vulnerable to manipulation. For example, the BAYC vault token has only $382,000 worth of liquidity on Sushiswap, despite being one of the most liquid NFT collectibles.
For holders of these more liquid collectibles, despite all these issues, this approach may be preferred by these borrowers because a) not only on-exchange assets typically dominate the collectibles (50-75% of items ), and b) the required depth will not be that great, since most borrowers don’t borrow on large scales given the distributed nature of many collections.
FloorDAO is looking to solve this problem by scanning and binding, an approach that has limited scalability as it is curated by gFloor holders.
Finally, there is often a spread between the NFT price and the price provided by the NFTX quote/pool oracle. This could be due to a variety of reasons, from lack of arbitrageurs/poor liquidity of collectibles, and – which is more of a problem plaguing NFTX – stolen assets in pools (which cannot be sold on Opensea).
Pros: Currently the most widely used method (~$30M in locked liquidity)
Cons: Low liquidity, only suitable for floor NFTs
Utilize Sudoswap AMM
For the uninitiated, Sudoswap is a protocol that aims to provide a Uniswap V3-like experience for NFTs by allowing centralized liquidity to act as sell/buy orders.
Given the high degree of non-fungibility of funding pools, it remains to be seen how Sudoswap-based oracles have a lot of depth even for some of the more liquid collectibles. Uniswap V3 oracles can avoid this exact problem by having a lot of liquidity, making manipulation more difficult as it makes it harder for liquidity to be pushed out of range. For example, Uniswap V3 requires at least $1 million in full liquidity for a pool to be verified on Rari Fuse.
Also, compared to the ERC-20 + AMM approach, NFTs are still ERC-721 and do not face the issue of actual NFT price spreads as there is no fragmentation step involved.
Pros: Sudo is more straightforward when dealing with ERC-721
Disadvantages: Easier to be manipulated by oracles and not designed to be used as oracles
Proven methods that rely on Chainlink oracles can also be applied to NFT pricing.
For example, Jpeg’d relies on Chainlink to provide TWAP at the floor price to Bored Apes and Punks. Special care needs to be taken to rule out wash trading or other attempts to manipulate prices, but it is certainly a solvable problem.
One caveat to this approach is that it is limited to the most fluid collections: Bored Apes, Punks, and maybe others.
Pros: Reliable, easiest to integrate into DeFi
Cons: Floor assets limited to the most liquid NFTs
Off-chain analytics can include a variety of techniques for analyzing data.
For example, NFTBank and Upshot use ML to extract features from selected collections of popular NFT collectibles for valuation.
Goblin Sax (fka Gringotts DAO) takes a similar approach to getting on-chain data, but since they focus on lending, they also focus on historical data from lending platforms like NFTfi and Arcade.
The main disadvantage of this approach is that due to the more advanced nature of this analysis, the process of obtaining this data is centralized. For example, NFTBank has an internal model for NFT pricing.
This is in contrast to solutions like Chainlink price feeds, where multiple sources can provide data to corroborate to output the price of ETH in USDC.
Pros: Iterable, most correct
Disadvantages: Can rely on a single source for analysis, higher probability
Finally, there is Abacus Spot, an application that leverages optimistic staking to continuously evaluate individual NFTs against a pool of locked liquidity. If the owner believes that the Spot price is higher than the perceived market value, the relevant NFT can be deposited and auctioned. This is an abbreviated explanation of Spot, but a better explanation can be found here.
A major benefit of Abacus Spot is that it does not rely on a specific valuation mechanism, opting instead to index decisions on the spot for LPs that can deploy the strategies described above to maximize returns. This also means that Abacus Spot is broadly applicable to any asset, grails, 1/1, especially assets outside the art realm. This is reminiscent of a multi-armed slot machine, which allows optimal strategies to emerge over time.
A major disadvantage of Abacus spot is capital efficiency.
While stakers in undervalued pools can benefit from huge windfalls in situations where NFTs are overvalued, pools need to overvalue NFTs for this to happen. This is unlikely as the price would need to reach what the owner considers to be overvalued, which offsets the huge upside in the pool.
This means that, aside from the long-tail probability of NFT owners deciding to deposit and providing depositors with upside – the only native benefit is in the form of ABC tokens, which are the governance tokens of the Abacus protocol.
Pros: Backed by ETH, works with multiple assets
Cons: Capital-intensive, more granular pricing solutions are difficult given the 1-week minimum lock-in period, although the need for this is debatable.
All in all, there is still a lot of work to be done to improve the current field of oracles with NFT capabilities. Dynamically pricing illiquid assets is extremely difficult, and all of the approaches outlined suffer from limitations of one form or another that do not allow them to be robust enough for robust pricing.
As mentioned above, the high degree of overlap of these primitives opens up new possibilities, and we will explore why lending is so critical to accurate NFT pricing in Part 2 of this article.
Thanks to Chris of Goblin Sax, 0xRusowsky, George Beall, and a few others for suggestions and proofreading prior to release.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/article-on-current-and-emerging-nft-pricing-methods/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.